MLPs finished positive for the second straight week, the first time in 2015 MLPs have been positive for two consecutive weeks. Oil prices increased, helping the Alerian MLP Index (AMZ) finish up 0.3% this week. Large capitalization MLPs traded better on average than smaller MLPs this week. MLPs outperformed both utilities (-2.5%) and the S&P 500 (-2.2%) by a wide margin, an indication of how energy stocks in general are being driven by oil over all other macro forces (absent stock-specific news). This week it was to the benefit of MLPs, and as oil prices continue to recover over time it should be a tailwind for MLPs.

Oil price increased 5.6% in the futures market week over week, a second consecutive positive week. Oil prices rallied Thursday on news of the Saudi-led middle-eastern contingent of countries launching air strikes against rebels in Yemen, increasing tensions among major countries in the Middle East (Saudi Arabia and Iran). The US dollar also showed continued weakness, helping oil prices early in the week. Oil storage continued to build in the U.S., but the focus shifted to geo-politics this week.

It was refreshing to see MLPs play the defensive role this week, but it still feels choppy with question marks on oil storage, equity issuance and growth question marks for some MLPs. East Coast is on Spring Break this week, so I’ll keep it short.

Winners & Losers

Two shipping MLPs led the way this week, along with small cap value names CCLP and USDP. On the downside, each of the bottom five comes from a different MLP subsector, so hard to read much into that. In general, MLPs have traded pretty erratically with individual names trading in opposite directions of their peers on different days.

NMM bounced from worst last week to first this week. FELP did the reverse, falling back after a strong week last week. NSLP made it a second straight week near the bottom of the sector.

CCLP leads the way so far this year, with fellow compression MLP USAC in the top 5 as well. Every MLP in the top 5 besides CCLP declined this week. Upstream MLPs dominate the bottom 5, with 3 E&P MLPs and 1 coal MLP in a tight bunch near the bottom.

News of the (MLP) World

Much more action in the MLP space this week, including private equity alliances, small pipeline JVs, drop downs, and debt deals. Despite all the action, we haven’t yet seen the big M&A come through, at least not since the Hiland deal and the Energy Transfer clean up merger with Regency. PAA, KMI, ETE and others have been vocal about acquisitions, maybe next week some of those deals surface. IPOs are coming as well.

Incoming CEO Jeremy Bergeron (CST SVP of Integration and Development currently) was quoted in the press release saying “my family and I are thrilled with the prospect of joining the Allentown (PA) community.”

MLPs stopped issuing equity, the Dollar faltered, oil and gas prices bounced, interest rates collapsed, the heavens parted…and that’s all it took for MLPs to finally trade up this week. The Alerian MLP Index rose 1.7%, well ahead of the Alerian MLP Equal Weight version, indicating strength in larger MLPs, something we haven’t seen much of this year. MLPs trailed the S&P 500 (+2.7%) and Utilities (+3.8%), but green is green, so no complaints.

Oil prices have bounced off their fresh lows hit on Tuesday, helped by broader macro factors that held back the Dollar this week. Oil inventories had another large build this week, so the oil price bounce still feels shaky.

Deal Break

After 5 equity offerings last week, there was not a single offering this week, and very little deal-making to speak of this week. And why would there be deals? Every school in the greater Houston area, it seems, was on Spring Break this week. Public schools in Memorial (Spring Branch ISD), West University (HISD), the Woodlands, plus private schools St. John’s, Kincaid and Episcopal were all off. Many MLPs are based in Houston, but a greater percentage of the bankers and lawyers that service them are located there. I expect they’ll get back to the work of deal making and accessing capital markets next week.

I was in Calgary this week (not for Spring Break). I heard a few times about a slightly different break in the spring, called spring breakup. Particular to Canada, spring breakup happens each year when roads are soft from frost melting and heavy equipment can’t travel on those roads, leading to less production activity for a month or so.

Maybe this week’s positive MLP price action represents some kind of thawing of the frost surrounding MLPs. Or maybe it’s just a pause on a path lower for MLPs, because risk-on forces were too soft to let anything heavy weigh on MLPs this week.

Winners & Losers

Marine MLPs led the way this week, with TOO and GMLP having strong weeks. TOO’s performance was the result of first oil on the Knarr development and TK’s floating production storage and offloading connected to it. TOO is expected to buy the FPSO from TK at some point in the first half of 2015. In the oil beta category, DPM showed signs of life, while HCLP traded up with commodity prices.

Even in a positive week, there was a wide range of returns this week. Oil’s bounce didn’t help the 3 upstream MLPs that made the bottom five this week, 2 of which were repeats from the bottom 5 last week.

The top 5 year to date continues to be dominated by small-cap, non MLP Index names. The bottom 5 continues to be dominated by commodity exposed MLPs, like EVEP, ARP and ARLP, as you would expect.

TOO climbed out of the bottom 5 with its big week. MMLP climbed back near the top of the sector. CPLP broke into the top 5, presumably on the news that it will be joining the Alerian MLP Index.

Howard will acquire natural gas gathering assets in northeast Pennsylvania, including 100 miles of gathering pipeline with 600 mmcf/d of capacity and 53,000 horsepower of compression

Howard plans to construct a new natural gas gathering system in Tioga County, PA that will add up to 380 mmcf/d of capacity

Williams Partners (WPZ) received FERC approval for one project (press release), announced FERC application for another (press release)

Buckeye (BPL) announced open season for Cross Town Pipeline (press release)

Foresight Energy (FELP) announced that Murray Energy Corporation will acquire a controlling stake in FELP’s general partner (press release)

Murray will pay $1.4bn to acquire (1) an 80% interest in FELP’s GP, with 77.5% interest in the IDRs, (2) approximately 50% of the L.P. interest in FELP, and (3) access to other coal handling, transportation and transloading facilities

Murray has 12 coal mines and $713mm of 2014 EBITDA, some of which may be dropped down over time to FELP

Founder of FELP will retain 22.5% of FELP’s GP and 35% interest in FELP directly

MLPs sold off sharply this week, trading down 4 out of the 5 days. The Alerian MLP Index (AMZ) closed down 4.3% for the week, and is down 8.1% over the last 3 weeks. Lower oil prices were the primary driver of the sell off this week, and despite a much lower inventory build this week, oil storage building is the primary concern within the sector right now.

Piling on top of those fundamental issues were 5 equity offerings for nearly $2bn worth of new MLP paper that was not easily absorbed this week. There is not much to get excited about after the last three weeks, although there probably won’t be 5 equity offerings next week, so there is that. With earnings season in the rearview mirror, expect commodity prices to dominate price action in the near-term, with M&A as the only potential slump-buster for now.

The S&P 500 declined -0.9%, while utilities outperformed (+0.3%) on lower interest rates week over week. Oil price declined 9.2% in the spot market week over week, making it 4 straight negative weeks for oil prices. A strong dollar and seasonally weak refinery demand leading to inventory builds have the biggest contributors to negative sentiment. Natural gas prices reversed gains from last week, down 6.6% in the spot market.

Since oil prices climbed above $50/bbl a few weeks ago, there has been a rush to raise capital across the energy sector (beyond just MLPs). Total equity raised by U.S. energy companies so far this year has been more than $10.0bn already ($6.3bn from E&P corporations, $3.7bn by MLPs). That new supply of equity, combined with lower commodity prices has sent MLPs lower.

Winners & Losers

No trends on the upside this week, except that each of the top 5 did not issue equity this week. FISH led all MLPs On the downside, commodity price sensitivity was the prevailing theme. All 5 were upstream focused MLPs, 4 E&P and 1 oilfield services.

There was no real consistency week over week, as shown below. BBEP went from top 5 to bottom 5, but no other recurring names.

Year to date MLPs have declined 7.7%, but there are a few that have escaped the vortex of falling oil prices. None of the top five MLPs are in the Alerian MLP Index, and they are generally more thinly traded than other MLPs, which I think helped push a few of them lower than most MLPs in 4Q 2014, so when things first stabilized back in mid-January, they bounced hard. Upstream MLPs bounced hard in January as well on oil price optimism, but have collapsed with oil the last few weeks, such that several of them are now among the bottom 5. 4 of the bottom 5 are in the Alerian MLP Index (for now).

Recent volatility is highlighted in the below chart that shows week over week changes in the YTD winners and losers. EVEP and TOO remain at the bottom, but SDLP and ARP dropped in the bottom five this week. On the positive side, CLMT and MEMP dropped out of the top 5, FISH and CELP jumped into the top 5, while MMLP went from first overall down to fifth.

News of the (MLP) World

In a continuing theme over the last few weeks, MLPs are rushing to get equity deals done while they can, as the general consensus is that oil prices will be lower in the near-term, given storage builds. There were 5 equity offerings by MLPs for total gross proceeds of more than $1.9bn, bringing the total equity issued by MLPs through public offerings to $3.9bn in the last month.

Only one of the five offerings this week was accompanied by an acquisition announcement, proceeds from the remainder of the offerings will be used to fund previously announced 2015 capital expenditures related to development projects, which made after-market trading pretty sloppy.

EQM is acquiring the Northern West Virginia Marcellus Gathering System, which gathers natural gas production in the Marcellus Shale, and a 30-mile natural gas pipeline that connects the gathering system to a major processing hub

As part of the transaction, EQM entered into a 10-year contract with EQT that eliminates volume and commodity price exposure

Other

Alerian announced quarterly rebalancing (press release), removing 3 upstream MLPs from the Alerian MLP Index, and adding the following MLPs:

MLPs were volatile this week, trading in a different direction each of the five trading days. Down Monday, up Tuesday, down Wednesday, up Thursday, and down Friday. The price action reflects commodity price uncertainty that is leading to growth capex uncertainty. Growth capex has been the principal driver of distribution growth the last few years (outside of the drop down set of MLPs). The Alerian MLP Index (AMZ) traded down 2.5% for the week, and is down 3.9% over the last 2 weeks.

The S&P 500 (-1.6%) and utilities (-4.3%) were each lower this week for a second consecutive week. Oil price was flat this week, although it trended lower in the final two sessions of the week (-3.7% during that time). Natural gas prices recovered this week, but remains below $3.00 in the near-term futures market. NGLs fell back after rallying the last few weeks. The 10-year U.S. treasury rate rose 25 basis points this week, which didn’t help MLPs or utilities, and seemed to have a strong effect on the top tier growth MLPs on Friday.

Oil Storage Threat Level Rising

Prominent MLP management teams, sell-side research analysts, commodity consultants and even the Wall Street Journal (see here) are all discussing the level of storage in the Cushing, the U.S. overall and the world. The idea is that if we keep adding oil to storage, eventually we will run out of oil storage, leading to another leg down in oil prices.

Running out of storage has quickly become a consensus opinion, but the oil price has not yet collapsed, which indicates that there is a clear chance that we don’t reach capacity. The storage issues is a complicated triangulation between capacity limits, supply that is trying to slow down (but not fast enough), and demand growth (refinery downtime and strikes not helping).

Below is a snapshot of the U.S. storage picture as we sit today. If we continue to build storage at the same rate we’ve built the last three weeks, the U.S. will run out of capacity in 9 weeks, or early May.

Some caveats are necessary, however. One, the capacity listed on this chart is as of 9/30 per EIA.gov. This data gets updated every 6 months, and in the 6 months prior to 9/30, the U.S. added 13 mmbbls of storage, including around 3 mmbbls in Cushing and around 8 mmbbls on the Gulf Coast. So, there is probably some additional storage that has come online since 9/30, which may add a week or two to the countdown. Also, now that pipeline capacity has been built out between storage hubs, any one area of the overall U.S. storage picture (e.g. Cushing) is less important than it once was. Finally, in each of the last 5 years, during the 9 week period we are entering now, there has been at least one week where there was a draw (rather than a build) in oil from storage. So, it’s unlikely that the current pace of storage builds will continue for the next 9 weeks.

Winners & Losers

MMLP took the top spot for the week, as the market continues to gain comfort around MMLP’s distribution, which was oddly in question the last few months (at least based on their 11%+ yield at some point). SXE’s earnings this week struck a positive chord with investors. NGL led all MLPs to the downside, after it piled onto itself with an equity deal at the end of an already bad week of trading.

CNNX made the bottom 5 for the second straight week, as investors continue to vote with their feet after 2015 guidance redefined top tier distribution growth as sub 20%. No repeats among the top 5, as it continues to be difficult to maintain price momentum in this market.

For the year so far, MLPs that at some late last year had their distribution sustainability questions are leading the way to the upside. MMLP wasn’t even in the top 5 last week, but finds itself sitting atop of the sector at this point.

CNNX’s fall the last two weeks put it into the bottom 5 for the year overall. DPM’s fall from investment grade has landed it in the bottom five as well. SXE and CAPL popped out of the bottom 5 this week.

Light news week, but we had a second consecutive week of an MLP doing an equity deal without a clear transaction to use the proceeds for. The offerings help lockup financing for 2015 capex, but doing so now after the selloff the last few months speaks to the bearishness of MLP management teams on the outlook for a sustained rally in MLPs.

Consideration of 1.3mm common units issued to seller, implying approximately $37mm purchase price

Western Gas (WES) announced IOU acquisition of 50% interest in the Delaware Basin JV gathering system from Anadarko (press release)

WES will pay nothing at closing, but has written an IOU to Anadarko whereby they agree to make a payment in 2020 equal to 8x the average EBITDA from 2018 and 2019 (purchase price expected to be $283mm)

WES expects to receive $15-25mm EBITDA from this acquisition in 2015

Creative structure enables WES to maintain its 15% distribution growth target for 2015, and highlights the value of a truly supportive sponsor

Other

TEP closed acquisition and announced recommendation to board of 15% distribution growth over the next 2 quarters (press release)

After a positive week last week, MLPs declined 1.4% this week. The MLP Index has been unable to string together two consecutive positive weeks in more than 2 months. The market was (understandably) unable to soak up $1.7bn of new MLP equity this week without MLP prices declining. It didn’t help that PAA, which represents 7.5% of the index, was down 3.1% this week after executing a $1.1bn equity offering (its first marketed equity offering in more than 3 years).

MLP trading lately has reminded me of a toddler who is just beginning to try to walk. He takes a step, teeters, takes another step, loses his balance and falls on his butt. Ultimately he either learns to walk or breaks down crying after one too many failed attempts.

Similarly, MLPs trade up, seem to be getting momentum, but quickly lose their balance and fall back again. The challenge for MLPs is that the floor keeps tilting back and forth with changes in commodity prices, de-stabilizing equity offerings, and other risks like producer distress. Ultimately, with time, MLPs should emerge from this lengthy correction with reset expectations, positioned to produce attractive total returns off a lower base.

Monthly Checkup

Despite ongoing choppiness for MLP stock prices, MLPs did manage to post positive monthly performance, breaking the longest streak of negative months (5) in the 20 year history of the MLP Index. Despite the positive month, MLPs remain 14.6% below their end-of-August peak. MLPs are still down so far in 2015, but with another positive month, MLPs may still close 1Q in positive territory.

Winners & Losers

RRMS, CMLP and DKL all reported 4Q results this week that pleased the market. RRMS’s beat and 3 year top tier distribution guidance sent it 8.7% higher on Friday. CMLP rebounded this week after resetting expectations for growth, but also calming the market with respect to maintaining its distribution. DKL put up another strong quarter of results and reiterated its almost top tier growth trajectory.

On the downside, TEP’s equity offering and GP IPO filing sent its stock price reeling. CNNX re-defined top tier growth a bit lower than we did here the last two weeks, and that was not well received by the market on Thursday and Friday, despite very strong quarterly results.

TEP and CMLP flip flopped vs. last week, but no other repeats in a very inconsistent MLP market so far in 2015.

For the year so far, FISH dropped from first last week to off the board this week, replaced by CLMT, EROC and LINE. On the downside, TOO crept up from the bottom spot to 3rd worst, while GMLP replaced fellow shipping MLP TGP in the bottom 5 this week, after falling 8 out of the last 9 days.

News of the (MLP) World

Lots of capital markets action this week, including more than $6bn of bonds and $1.7bn of equity. That’s a lot of paper for an MLP market that is still teetering and lacks the trading volume and daily flows from retail investors that provided tailwinds to the sector the last few years. It’s now an all-out war to attract investors, now that the overall pie isn’t growing quite so fast.

MLPs rebounded this week, with most of the gain came on Friday when MLPs rallied despite lower oil prices. The Alerian MLP Index (AMZ) traded up 0.7% for the week, and is now 3.0% higher than the February low from last Wednesday. Performance was better among midstream MLPs than upstream MLPs, and better among larger MLPs, with significant differentiation among winners and losers within subsectors.

The S&P 500 posted a third consecutive positive week up 0.6% to new highs, while utilities posted 1.0% gains for the week. Oil prices finished 4.6% lower this week on continued U.S. inventory builds, and the latest rig count reports that apparently weren’t draconian enough to sustain a fourth consecutive positive week for oil prices. Continued cold weather helped natural gas prices spike, up 9.6% this week and 17.1% since hitting a 52-week low two weeks ago. Cold weather has also helped propane price change this year outpace all other energy commodities.

Top Tier Over the Years

Last week, I ranked MLPs that have paid a distribution for at least a year (so not including recent IPOs) based on their historical annual distribution growth rates. Top Tier MLPs are growing quite rapidly, with each of the top 20 MLPs growing distributions at an annual rate of more than 15%.

I was curious about how that top tier looked 5, 10, and 15 years ago. I have run the numbers and below I share the summary results. The number of fast growing MLPs has expanded along with the universe of MLPs, but the percentage of MLPs growing more than 15% annually has been higher than it is today before (in 2005).

Other takeaways:

MLP distribution growth rates were quite low exiting 2009 after the financial crisis sent commodity prices tumbling. MLPs appear better positioned this time around based on 2015 guidance so far.

In 2000, there were still many MLPs content not to grow distributions at all, about half of the universe of 19 MLPs had not grown distributions at all in the 3 years prior to 2000. This was the very early stages of the growth MLP model. (KMP led the way with 32.0% 3 year CAGR, followed by BPL at 17% and Teppco Partners at 15%).

2005 was close to the apex of the first round of growth MLPs that were able to grow consistently by acquiring assets from third parties. Once more MLPs came to market, competition for acquisitions heated up, and the sector started shifting towards “organic” growth and drop-down acquisitions.

2015 growth MLPs rely on sponsor-driven growth (i.e. drop downs). 17 of the top 20 fastest growing MLPs today achieved their growth with the assistance of drop downs. In 2010, just 7 out of 20 relied on drop downs. In 2005 and 2000, drop-down MLPs were even scarcer.

Another Obtuse Index Change

Alerian announced BWP to be added to the 50-member Alerian MLP Index and Alerian MLP Equal Weight Index, replacing APL (press release). BWP was removed from the index last year after cutting its distribution drastically. Prior to its removal, BWP had been in the index since December 2005 (just a month after its IPO in November 2005, before there were 50 MLPs trading). BWP does not currently pay its minimum quarterly distribution, which is a criteria for inclusion in the index. I guess there were no MLPs that met all the qualifications for inclusion, so BWP may have been added because it checked the most boxes of Alerian’s criteria (found here).

Expect more turnover with the index going forward, assuming that distribution cuts beyond the MQD disqualify VNR, EVEP, LINE and BBEP from inclusion in the next rebalancing, and assuming the ETP/RGP deal closes. Below is a chart that highlights the changes to the index since the beginning of 2014, which highlights the massive turnover and the weight redistribution towards large caps, but also some names getting shuffled in and out of the index (yellow shaded names).

Winners & Losers

TEP announced solid results and surprised the market by giving 3 year guidance for 20%+ distribution growth annually. RMP caught a bid this week, presumably on stronger gas prices and a possible read through to higher volumes. PBFX continues to climb higher after its big distribution announcement last week. Better results out of MEP caught the market by surprise, sending its units higher.

On the downside, upstream MLPs VNR and NSLP were dragged down by lower oil prices, but we aren’t seeing the wide daily swings in upstream MLPs that we saw a few weeks ago. CMLP was down on news that a customer that represents 10% of EBITDA may finally throw in the towel and go CH 11. EQM seems to be suffering from some GP overhang, down 6.7% this week. PSXP’s offering contributed to its weakness.

NSLP went from top performer to near the bottom on weaker oil prices this week. MEP made it two weeks in a row in the top 5.

Year to date, small cap, high beta MLPs dominate the top and bottom 5. Of note, I have not included NKA and RNO in these charts and will not going forward. Generally stocks that trade below $5.00 and pay little or no distribution show up on these charts because of volatility, but are mostly meaningless to MLP investors, so it makes sense to exclude them to get a better picture of what’s moving among significant MLPs.

DPM and WLKP escaped the bottom 5 this week, while CELP and NMM made the cut for the top 5, displacing NSLP and LRE.

News of the (MLP) World

Reports of 4Q2014 results were again the focus this week. Results and stock price reactions were mixed, but the market generally reacted positively to receiving clarity on 2015 capital expenditure and distribution growth plans. While trading volumes in MLPs have trended down over the last few months, the capital markets remain open to MLPs, confirmed by a $396mm equity offering from PSXP.

The MLP Index stumbled this week, but the index remains up 2.8% for the month so far, on track to post its first positive month since August. The index has produced negative 13.9% total return since the end of August, but has rallied 9.4% (including distributions) since January 15th. Performance was balanced across the sector as midstream MLP earnings reports helped them gain traction, while upstream and oilfield services MLPs continued higher with oil prices starting mid-week.

The S&P 500 posted a second consecutive positive week up 2.0% to new highs, while utilities declined for the second straight week and finished down 3.4%. Oil prices were volatile but climbed higher Thursday and Friday and 2.1% for the week, making it three positive weeks in a row. Natural gas spot price rebounded 6.8% this week after 3 straight weeks of declines, with expected cold weather in the northeastern U.S. the likely driver.

In the upcoming week, some very large and active MLPs are set to report earnings, including: ETP/ETE/SXL, WPZ, and ENLK.

What is Top Tier?

Top tier growth is oft alluded to in the MLP sector, and the more hyper growth drop-down MLPs that go public, the higher the hurdle rate is for making it into the top tier club. But when an MLP guides to “top-tier” distribution growth, what does that mean? Below I’ve gathered some data on the top 20 MLPs that have paid at least a year’s worth of distributions, so several of the self-proclaimed top-tier MLPs (e.g. DM, SHLX, CPPL, etc) are not included.

The top 20 fastest distribution growth MLPs over the last year have increased their distributions by an average of 26.9%, while the top 5 averaged 44.8% growth. On a 3 year CAGR (or shorter if the MLP has not traded for 3 full years), the top 20 fastest growing MLPs have grown distributions at an annual rate of 22%, with 31.5% average for the top 5.

Of the 100 or so MLPs included in this analysis, it’s pretty incredible that 20% of them have grown distributions more than 15% annually over the last few years. With new high-growth MLPs and with consolidation of smaller MLPs, the top tier looks like it will push higher for the next few years, and a quarter of all MLPs may grow 15% or more. Visibility into that kind of growth from sponsor-driven distribution growth helps mitigate impact of commodity prices, at least for a little while until the drop-downs slow down for some of these MLPs.

What about GPs? There are only 11 (for now) pure play or nearly pure play GPs that I track. The average growth rate of those over the last year is 30.5%, and 24.4% over 3 years. The top 5 have grown even faster, with average YOY growth of 45.5% and 33% over 3 years.

Next week, I’ll come back with some analysis of how the “top-tier” annual distribution growth rate has changed over time. MLPs may have achieved growth rates this high, but driven by third party acquisitions (which were much less competitive back then). No MLPs publicly-guided to 20%+ distribution growth a decade ago.

Winners & Losers

MLPs in the same subsector went in different directions this week, a symptom of the volatility we’re seeing week to week. Coal MLP RNO rallied 11.4% while coal MLP NRP declined 12%. Upstream MLP NSLP led all MLPs with a 23.9% gain, while upstream MLPs BBEP and EVEP each made the bottom five.

3 of the bottom 5 were up 25%+ last week, so a selloff was understandable for BBEP, JPEP and EVEP.

For the year overall, CCLP has claimed the top spot from LINE, while FISH, NSLP and LRE join the top 5.

NRP replaced TOO in the bottom 5 this week.

News of the (MLP) World

This week we got the first follow-on equity offering to trade up after pricing so far this year. Not a bad indicator for the state of the capital markets. We got another couple of third party acquisitions and a sizeable drop-down. Also, as has become almost as routine as MLP IPOs, we got another Alerian MLP Index constituent change.

MLPs traded well this week, helped by firming crude oil prices, outperforming the broader stock market and utilities for the second straight week. The Alerian MLP Index (AMZ) increased 3.7% (including distributions) and the Alerian MLP Equal Weight Index (AMZE) was up 6.1%. Strong price performance by upstream MLPs helped AMZE post positive performance. The AMZE has now produced 12.9% total return in 17 days, while AMZ has produced 10.3% return. The S&P 500 rebounded 3.0%, while utilities finished down 4.1%. Oil prices finished 7.9% higher this week, making it two positive weeks in a row for oil prices. Natural gas spot price continued to slide, down 4.1% to a new 52-week low.

MLP earnings season continues this week (and for a few more weeks after that) with several interesting MLPs to report, including NGLS, TLLP and BWP.

Patriot Parallels

MLPs are a bit like the New England Patriots. More specifically, they are like the Patriots of Week 5 of this NFL season. After more than a decade of sustained success, 5 Super Bowl appearances and 3 wins, the Patriots started the season 2-2. The sports media began questioning the Patriots. Was this the year they falter and Brady loses the ability to lead his team to victories? Would Belichick ever be able to win a Super Bowl without cheating?

The Patriots responded, winning 9 games in a row, getting the top seed in the playoffs, and capping the season by winning the Super Bowl in dramatic fashion. In doing so they became the youngest team to win a super bowl ever. Only 2 current players were on the team the last time the Patriots won the Super Bowl. This year’s outperformance was made possible by younger players like Edelman, Gronkowski and Malcolm Butler.

MLPs have produced exceptional returns for investors for decades, providing income and growth, through good times and bad times. But over the last 5 months, MLPs have struggled, and many are questioning their ability to continue to produce market beating returns going forward.

As earnings have been released and it has become clear that MLPs will continue to grow distributions in this environment, MLPs have begun to rally over the last few weeks. Obviously oil prices rallying 16.2% in 7 days helps. But after more than 60 MLP IPOs in 5 years, there are now more MLPs under 5 years old than over 5 years old, and the average age of all MLPs is around 6.6 years (3.6 years median). The youth movement in MLPs positions the sector for revitalized growth. Like the Patriots, the drivers of outperformance in the MLP sector going forward will be the younger players, MLPs that were not on the team the last time MLPs outperformed the S&P 500 (4 years ago!).

Winners & Losers

NKA suspending its distribution sent the stock down 58.8% this week. No other MLP was down double digits this week. On the upside, there were many double digit performing MLPs this week, including the top five, which were all up more than 25% each, and for the second straight week they were mostly upstream MLPs. LGCY and BBEP each made the top 5 for consecutive weeks.

LINE has taken the lead among MLP returns for the year so far, joined by JPEP and NMM, two small cap MLPs that have had positive company-specific announcements in recent weeks. On the downside, DPM recovered a bit, but remains the worst performing MLP this year among those with more than a $3bn market cap.

Quite a bit of movement week over week for YTD return leaders and laggards. NKA went from first to worst, EVEP bounced all the way from last place to out of the bottom 5. Not a single member of the top 5 YTD as of last week, remains in the bottom 5. Wild swings.

News of the (MLP) World

The week was highlighted by the first MLP IPO of the year, Columbia Pipeline Partners (CPPL – Natural Gas Pipeline & Storage MLP), which was successful by any measure. The offering was upsized, was priced $2/unit above the offering price range and traded up 16.5% on its first trading day. In the end it was the second largest MLP IPO ever at $1.1bn.

MLPs were mixed this week, but outperformed the broader stock market and utilities. The Alerian MLP Index (AMZ) capped the worst January ever recorded by the MLP index with a 1.5% decline (including distributions) this week. It wasn’t all bad, as strong price performance by upstream MLPs helped the AMZE post a positive week.

The S&P 500 finished down 2.8% for the week, while utilities finished down 1.8% even with a significantly lower yield on U.S. 10 year treasuries. Oil prices finished 6.7% higher this week, including an 8.3% rally on Friday. Natural gas spot price continued to slide, down 9.5% this week to a new 52-week low on general oversupply.

Status Update

The MLP Index has never before had 5 straight negative months, but that’s where we are now, with the index having declined each month and 16.3% overall since the end of August. MLPs finished down for the month of January for the first time since 2008, breaking a streak of 6 consecutive years. 2 of the other 3 times when January was negative, the MLP Index was negative for the full year (2002 and 2008).

MLPs are overdue for a bounce that sustains itself long enough for a positive month, but that’s been elusive in a steadily declining commodity price environment. Since the OPEC meeting in November, however, the individual MLP news flow has been relatively light.

Over the next few weeks, we will be overwhelmed by MLP earnings releases and 2015 guidance releases that has a chance to highlight the resiliency of MLP cash flows in the face of falling commodity prices. We have started to see some differentiation creep back into the MLP sector as distribution announcements and earnings releases have started rolling in.

Winners & Losers

Upstream MLPs bounced back in a big way this week, well before oil prices snapped back on Friday, and they occupy 4 of the top 5 spots. VLP made it two straight weeks in the top 5 after its sponsor announced a faster drop down pace, which apparently was news to the market. After announcing its role as the white knight to RGP’s distressed valuation, ETP’s price declined. Another large-cap MLP DPM made the bottom five on deteriorating processing economics for its sponsor DCP Midstream, LLC, which carries the commodity price exposure for DPM. TOO made it two straight weeks in the bottom five.

DPM’s poor week lands it on the bottom five YTD list this week. Rallies in upstream (see above) helped most upstream MLP escape the bottom five (EVEP was left behind). SDLP was flat week over week, but drops into the bottom five YTD by standing still. On the upside, FISH continued higher and jumped from 5th place to 2nd place.

News of the (MLP) World

We got some more big M&A this week, but it was more of a cost of capital clean-up trade than strategic M&A activity. We did get another positive indicator in the face of the bleak commodity price environment when the first MLP IPO of the year launched. The dark side of lower NGL prices showed itself this week as well, as DPM’s sponsor announced a 20% workforce reduction.

CPPL is selling 42.6% of total units in the offering. If the underwriters overallotment is exercised, the public will hold almost all of the common units of CPPL, with NiSource retaining the subordinated units

CPPL will own 14.6% of Columbia Pipeline Group, the opco that will house all of NiSource’s midstream assets, which consist primarily of natural gas pipelines serving the Northeast region of the U.S., and a substantial backlog of development projects

CPPL will have $250mm of net debt on its balance sheet, a departure from recent hyper-growth MLP spin offs which have gone public with no debt and cash on the balance sheet to enable accretion from drop downs easily without needing to issue equity

Tallgrass Energy (TEP) announced plans for its sponsor to file for GP IPO (press release)

This is the second GP IPO plan that has been announced in the last few months (EQM’s sponsor is planning a GP IPO as well)

M&A / Growth Projects

Energy Transfer Partners (ETP) announced the acquisition of Regency Energy Partners (RGP) in a transaction valued at $18bn, including assumed debt (press release)

ETP will acquire RGP in a stock for stock transaction whereby RGP unitholders will receive 0.4066 ETP units and a cash payment of $0.32 for each RGP unit

Energy Transfer Equity (ETE), which owns the general partner and 100% of the incentive distribution rights (IDRs) of both ETP and RGP, has agreed to reduce the IDR payments it receives from ETP by a total of $320mm over a 5 year period

Acquisition price represented a 13% premium to the prior closing price of RGP

The transaction makes ETP the second largest MLP

The transaction is accretive to ETE distributions per unit immediately and to ETP distributions per unit in 2016 and beyond

Magellan Midstream (MMP) extends open season for Saddlehorn oil pipeline another month to the end of February (press release)

The Saddlehorn pipeline project is designed to be a 600-mile, 20-inch diameter pipeline capable of transporting up to 400,000 barrels/day of oil from Colorado to Cushing Oklahoma

MMP has already received binding commitments from Anadarko Petroleum and Noble Energy

Other

Alerian announced changes to AMZ and AMZE Indexes to reflect the merger between WPZ and ACMP (press release)

It’s time again for the MLP sector over-unders, in a post that has become an annual tradition. The post is coming out a bit late this year, and that means we have some early indications on many of the statistics, but there are plenty of unknowns in the sector to discuss.

The goal of this exercise is to discern the market’s expectation for certain statistics related to the MLP sector in 2015, and then to make a directional call on that number with some commentary. In other words, we set lines for MLP sector numbers and we enter our picks (see previous years: 2012, 2013, 2014). Then we come back next year and review how we did (last year I went 4 for 10). The concept was originally inspired by a recurring segment on the TV show “Pardon the Interruption” called Over Under.

Like we did last year, we hope that you will share your expectations for each item with us. It’s a fun way to speculate on expectations the market has for MLPs for the year, and to compare those expectations with ours and yours.

1. MLP IPOs

Line: 12

My Pick: Under

2014 Result: 18 (not counting NextEra Energy Partners, Landmark)

2013 Result: 19 (not counting CQH or PAGP)

The last three years, we have seen an average of 16 MLP IPOs per year. I expect fewer IPOs this year than last year. The MLP IPO backlog is higher today than it was a year ago, but the market is likely to be less receptive to MLP IPOs in 2015 compared with recent years. Already we have seen one MLP in the backlog forego the IPO process by acquiring a GP interest in an existing MLP as a way to access the MLP market. We will likely see other “dual-track” processes whereby a MLP sponsor files for an IPO and also runs a sell-side process simultaneously.

The backlog of MLPs that have filed for an IPO stands at 12, with another 4 companies that have publicly disclosed their intent to launch an MLP IPO, for a total of 16 companies. I believe a reasonable expectation, given the collapse of oil and recent MLP weakness, is that 25% of those filed or planned IPOs don’t get done. That takes the expectation for the year down to 12, and while the backlog could grow over the course of 2015, some names in the backlog might be removed as well, so 12 is probably a reasonable expectation for MLP IPOs in 2015.

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Alerian MLP Index Returns vs. S&P 500

Line: Pick ‘em

My Pick: Over

2014 Result: -880 basis points

2013 Result: -482 basis points

2012 Result: -1050 basis points

Since the end of 2011, MLPs have underperformed the S&P 500 pretty dramatically. If you invested in the S&P 500 at the end of 2011, and compounded returns, you would have had 25% more by the end of 2014 than if you invested in the Alerian MLP Index. 3 years in a row is the longest losing streak MLPs have had since the late 1990s tech bubble. Early on in 2015, it looks like the S&P is on track to win another year.

I believe the streak will end this year, and MLPs will outperform. MLPs had a rough last 4 months of 2014, and by now the commodity price collapse is pretty well priced in for midstream MLPs. After a few upstream MLPs in the Alerian cut distributions, the index will rebalance itself away from upstream MLPs, reducing the index’s exposure to commodity prices. As oil prices stabilize, and start gathering upside momentum, MLPs should begin to price in a brighter tomorrow for energy stocks.

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3. AMZ (cap-weighted) vs. AMZE (equal weight)

Line: Pick ‘em

My Pick: AMZE

2014 Result: AMZ +1078 basis points

2013 Result: AMZE +291 basis points

10 year average: AMZE +70 basis points, but AMZE only outperformed 4 out of 10 years

AMZ outperformed the AMZE by more than it ever has in 2014, driven by strength in large cap MLPs (KMP/EPB buyout helped that) and by massive losses in upstream MLPs. With all the turnover within the Alerian MLP Index constituents, the newer, high growth MLPs (like MPLX, PSXP, VLP recently added) have been replacing upstream MLPs. QRE was acquired, BBEP and LINE will need to come out of the index, and pending mergers (APL, WPZ, OILT) will add 3 more new names. Those high growth names will likely outperform. Also, consolidation within the sector favors the potential target MLPs as opposed to the mature, large cap MLPs.

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4. General Partner Holding Company IPOs

Line: 2

My pick: over

2014 Result: 0

2013 Result: 1, but 3 if you count CEQP and OKE

2012 Result: 1

We had a streak of 4 straight years of 1 GP IPO per year (TRGP, KMI, WGP, PAGP) that ended in 2014. We had a lull this year, but after the IPO boom over the last 3 years, and the high growth rates of the newer MLPs spin-offs, there are several MLPs that are approaching the top tier of the IDRs. EQM’s sponsor has already announced plans for a GP IPO, and I expect others to follow. In addition, EXLP’s parent has plans to become a pure play GP in 2015.

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This line was determined based on the average of the prior three years results, and I think reflects about where the market expectations are. Consolidations are tricky to predict, but with all the talk from KMI and PAA, chances are we see some MLP change of control fireworks in 2015. My best guess is between true consolidations and GP sales, we get around 5 such transactions.

A few years ago, in the 2013 lines post, I suggested that ETP buying RGP might be one of the consolidations we saw that year. Well, 2 full years later that deal finally happened. So, counting the Azure Midstream / Marlin Midstream deal, we are already at 2 consolidations this year so far.

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6. MLP Distribution Cuts

Line: 6

My pick: over

2014 Result: 4

2013 Result: 1

2012 Result: 3

We’ve already had 4 distribution cuts in 2015 so far (LINE, BBEP, MCEP, NSLP), and other upstream MLP distributions have been called into question. With commodity prices depressed as they are, upstream MLPs are obviously feeling some pain, but there are likely some midstream MLPs that will contemplate distribution cuts as well.

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7. MLPs Bought by Corporations (exiting MLP structure like Kinder)

Line: None

My pick: None

2014 Result: 1 or 2 depending on how you look at it (KMP/EPB/KMR)

2013 Result: 1 (PXD/PSE)

The last two years, we have seen 2 sponsors buy in their MLPs. The success of the KMI transaction and its trading performance following the acquisition is bound to spawn some copycats. WMB would seem the most logical choice, but there are many other MLPs sponsored by corporations that might determine at some point that their MLP plans are broken beyond repair.

Not counted in this statistic would be the buyout of an MLP by a sponsor that is also an MLP. We’ve seen that a few times over the last decade (EPD’s buyout of Duncan Energy Partners, PAA’s buyout of PAA Natural Gas). We may see that again with the likes of EEP (with MEP), NGL (with TLP), and the planned buyout of orphaned MLP QEPM by TLLP.

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8. Equity Issuance in Marketed Offerings

Line: $26.7bn (average of last two years)

My Pick: under

2014 Result: $26.9bn

2013 Result: $26.5bn

With the commodity price challenges, tepid fund flows and lower trading volume of late, MLPs will be seeking unique ways to finance growth project that help them avoid issuing common equity in public offerings. MLPs will still raise substantial equity from the capital markets, but I don’t expect we’ll approach 2014 levels, especially with the rise of ATM issuance and without KMP in the MLP sector.

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9. MLP Sub-Sector Returns

My Pick: Gathering & Processing

In 2014, the best performing subsector within the Alerian MLP Index was the natural gas pipeline segment, which would have been a tough call early in 2014 after BWP’s distribution cut and EPB’s reduced distribution growth plans. But with EPB being bought out at a premium, and with strong returns from SEP, EQM, TEP and TCP, natural gas pipelines shined brightest in 2014. Oil and refined products pipeline MLPs came in second, based on our calculations. Worst performers that could potentially bounce back in 2015 include upstream MLPs and oilfield services MLPs.

There is quite a bit of uncertainty surrounding several subsectors that underperformed last year, including E&P, oilfield services, marine transportation, and gathering & processing. One of those subsectors will likely outperform the rest in 2015.

I believe gathering & processing MLPs are poised for a bounce back. As a group, they have shifted to a more fee-based model than they had in the last commodity collapse in 2008, and yet they have sold off rather dramatically the last few months. If they can show cash flow resilience throughout the year, it will help performance. Also, there may be significant M&A activity that drives returns for G&Ps.

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10. 2015 Average WTI Spot Oil Price

2014 Average: $93.17

2013 Average: $97.98

My pick: $55-$65/bbl

To this point, almost a month into 2015, the WTI spot oil price has averaged around $47/barrel. In order to average $70 per barrel for 2015, oil prices would need to average around $71.50/barrel every day for the remaining 235 or so trading days left in the year.

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